[Congressional Record Volume 144, Number 143 (Sunday, October 11, 1998)]
[Extensions of Remarks]
[Pages E2068-E2069]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                  CONSOLIDATED TAX RETURN LEGISLATION

                                 ______
                                 

                          HON. PHILIP M. CRANE

                              of illinois

                    in the house of representatives

                       Saturday, October 10, 1998

  Mr. CRANE. Mr. Speaker, today, I am introducing, along with 
Representatives Nancy Johnson, Barbara Kennelly, Jim Ramstad and Jerry 
Weller, legislation which would repeal a number of limitations 
contained in the consolidated return provisions of the Internal Revenue 
Code. These limitations, which were enacted in 1976, are a relic from a 
time when the financial services world, and the taxation of financial 
institutions, particularly insurance companies, was far different from 
today. The limitations serve no purpose today other than to make the 
application of the tax laws more complicated for both the taxpayers who 
have to follow them and for the Internal Revenue Service which must 
devote an inordinate amount of resources to review the tax returns when 
they are filed. Needless to say, these restrictions also place 
affiliated groups of corporations which include life insurance 
companies at an economic disadvantage compared with other corporate 
groups.
  I had hoped that we would have been able to consider tax 
simplification in the consolidated return provisions this year, as part 
of our ongoing efforts to make the tax laws easier to understand and 
administer. Unfortunately, that did not happen. It is my hope that 
introduction of this bill now will serve as a vehicle to focus 
attention on this problem and lead to repeal of these limitations when 
we consider tax legislation next year.


                               Background

  With that introduction, I would like to give a short explanation of 
the issues that this legislation addresses.
  The consolidated return provisions in the tax laws were enacted so 
that the members of an affiliated group of corporations could file a 
single tax return. The right to file a ``consolidated'' return is 
available regardless of the nature or variety of the businesses 
conducted by the affiliated corporations. The thinking behind this is 
easy to understand. We should be taxing a complete business entity, not 
separate parts. It should not matter whether an enterprise's businesses 
are operated as divisions within one corporation or as subsidiary 
corporation with a common parent company. If the group is one economic 
unit, it should have to file only one tax return each year. The tax 
return should reflect the taxable income of the entire enterprise.
  Corporate groups which include life insurance companies, however, are 
denied the ability to file a single consolidated return until they have 
been affiliated for at least five years. Even after groups with life 
insurance companies are permitted to file on a consolidated basis, they 
are subject to two additional limitations that do not apply to any 
other type of affiliated group. First, non-life insurance companies 
must be members of an affiliated group for five years before their 
losses may be used to offset life insurance company taxable income. 
Second, non-life insurance affiliate losses (including current year 
losses and any carryover losses) that may offset life insurance company 
taxable income are limited to the lesser of 35 percent of life 
insurance company taxable income or 35 percent of the non-life 
insurance company's losses.
  Prior to 1976, life insurance companies could not file consolidated 
returns with other affiliated companies. The inability to file 
consolidated returns was of little consequence until the 1960s and 
early 1970s when states first began to change the laws to allow life 
insurance companies to have subsidiaries. Thus, the rules in present 
law were considered a modest step in the right direction.
  The historical argument against allowing life insurance companies to 
file consolidated returns with other, non-life companies was that life 
insurance companies were not taxed on the same tax base as non-life 
companies. This argument is unfounded today. Prior to 1958, life 
insurance companies were taxed under special formulas that did not take 
their underwriting income or loss into account. Legislation enacted in 
1959 took a major step toward taxing life insurance companies on both 
their investment and underwriting income. In fact, at the time the 
present law rules were under consideration in 1976, the Treasury 
Department took the position that full consolidation was consistent 
with sound tax policy.
  In 1984 and 1986, Congress reviewed the taxation of life insurance 
companies and made a number of substantial changes that have resulted 
in these companies being subject to tax on their total income at the 
regular corporate

[[Page E2069]]

tax rates. Today, life insurance companies are as fully taxed on their 
income as are other corporations. There is no reason to treat them 
differently today.


                              The Problem

  The current restrictions placed affiliated groups of corporations 
which include life insurance companies at an economic disadvantage 
compared with other corporate groups and also create substantial 
administrative complexities for taxpayers and the Internal Revenue 
Service. The five-year limitations, in particular, create irrational 
disparities between groups containing life insurance companies and 
other consolidated groups. Let me provide three examples:
  1. When a consolidated group acquires a target consolidated group 
with a life insurance company member, the target group is 
deconsolidated. This means that, unlike other groups, intercompany 
gains in the target group would be triggered into income while losses 
would continue to be deferred.
  2. For the five year period following a consolidated group's 
acquisition of a life insurance company, gains on any intercompany 
transaction cannot be deferred. Gains of other groups, which are 
allowed to file a consolidated return, are allowed to be deferred.
  3. Section 355 spin off transactions raise questions concerning the 
five year ineligibility period for the spun-off company even if the 
group had existed and been filing a consolidated return for many years.
  The ability to file consolidated returns is particularly important 
for affiliated groups containing life insurance companies. Many 
corporations in other industries can, in effect, consolidate the 
returns of affiliates by establishing divisions within one corporation, 
rather than operating as separate corporations. Unfortunately, state 
law and other, non-tax, business considerations generally require a 
life insurance company to conduct its non-life business through 
subsidiaries. The inability to file consolidated returns thus operates 
as an economic barrier inhibiting the expansion of life insurance 
companies into related areas.


                                Solution

  There are no sound reasons to deny affiliated groups of corporations 
including life insurance companies the same unrestricted ability to 
file consolidated returns that is available to other financial 
intermediaries (and corporations in general). Allowing the members of 
an affiliated group of corporations to file a consolidated return 
prevents the business enterprise's structure, i.e., multiple legal 
entities, from obscuring the fact that the true gain (or loss) of the 
business enterprise is the aggregate of the gain (or loss) of each of 
the members of the affiliated group. The limitations contained in 
present law are so clearly without policy justification that they 
should be repealed.
  The legislation we are introducing today will repeal the two five-
year limitations for taxable years beginning after this year. For 
revenue reasons, the legislation will phase out the 35% limitation over 
seven years. This bill should be a part of any simplification or 
taxpayer relief legislation that may be enacted next year, and I hope 
my colleagues will join me in this worthwhile effort.

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